“one often in a position of authority who obligates himself or herself to act on behalf of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation : one (as an agent) having a fiduciary duty to another.”

The definition contains a number of key concepts:

“one … in a position of authority.” The person on whom the law places the duty is “superior” to the other person, usually because the fidicuary has a specific skill-set that the other does not. The fiduciary is an expert.

The fiduciary “act[s] on behalf of another.” The fiducairy must not consider himself ot his personal situation when making decisions, but instead the situation of the person for whom he is exercising his skills.

The fiduciary “assumes a duty” or a “moral obligation.” There’s an ethical component to the duty; it’s almost like a higher calling.

The fiduciary must act

In good faith: The Restatement of Contracts defines good faith as, “honesty in the fact of the conduct.” Most other areas of law use similar terminology and concepts.

“and with care, candor, and loyalty.” To a certain extent, these restate the need to act for another instead of oneself irrespective of the fiduciary’s situation.

The definition for obligation contains a number of phrases that imply a moral component …

“binding oneself … by a moral tie.”

“A duty … to follow a code.”

“A course of action … imposed by conscience.”

(The American Heritage Dictionary, (c) 1985).

Because the fiduciary has more knowledge or skill in a particular area, he can also take advantage of his client. The law therefore casts the relationship between the fiduciary and his client in moral terms.

Like this:

My colleague Jay Adkisson has written a summation of a new domestic asset protection trust case at Forbes. Another colleague, Steve Oshins, has weighed in as well. Mr. Adkisson argues this case is the final nail in the asset protection trust industry; Mr. Oshins argues for a less sweeping interpretation.

I counsel against these structures for a number of reasons, which are listed below in no order of importance.

1.) We have yet to see a grantor of a foreign or domestic asset protection trust (APT) win a case. Planners who still like APTs correctly argue that these cases have a potent negative combination: blatant fraudulent transfers and unsavory characters — an admittedly very bad combination of facts. Regardless, there are now a number of decisions where the APT failed when challenged. Why? That leads to point number two:

2.) APTs are bad public policy. At the heart of any case involving an APT is a creditor enforcing a judgment. A court upholding an APT will be opening the door to the idea that a debtor can “have his cake and eat it too;” he can be adjudicated to owe somebody money, have the financial capability to satisfy the debt, yet not do so — and, in fact, have a court say they don’t have to. That’s a detrimental holding in a capitalist economy that depends on credit financing to fuel economic growth. So far, courts don’t want to play.

3.) Point number 2 is derived from the Uniform Trust Code’s commentary to §505 which “… follows sound doctrine in providing that a settlor who is also a beneficiary may not use the trust as a shield against the settlor’s creditors. The drafters of the UTC concluded that traditional doctrine reflects sound public policy.” Several courts that have ruled against APTs have referenced this section ot the UTC.

4.) Are courts turning against asset protection planning? It depends on where you do it, but in California they are:

As indicated by Defendant’s testimony that prior to filing his bankruptcy petition, he met with an asset protection firm, and one of his goals in doing so, was to potentially protect his assets from potential creditors . . . and while he changed his mind about using the asset protection firm, the evidence of his consideration, meeting and paying the asset protection firm supports a finding that Defendant intended to hinder or delay his nonpreferred creditors.

One could argue that this decision should be taken with a grain of salt because it’s from California — a valid point. But, you can see the argument being effective regardless of the jurisdiction. Imagine this line of questioning in a deposition or at trial:

Lawyer: And on this date, you saw John Smith, correct?

Defendant: Yes.

Lawyer: Doesn’t Mr. Smith hold himself out as an “asset protection lawyer?”

Defendant: Yes

Lawyer: why did you feel the need to consult with him?

There’s no answer to this question that can’t be spun in a negative light.

5.) Creditors have a number of well-defined and clearly articulated methods of obtaining a judgment. Even Texas — my home and debtor’s haven — has a statutory path for creditors to obtain a judgment and satisfy it. What usually keeps creditors from pursuing a claim is time (litigation is an inherently long and drawn-out process), money (they will probably have to pay at least a portion of their ongoing legal bills), and effort (litigation takes an inordinate amount of time away from running a business). If a debt is small, it’s far easier to write it off as a business loss (see §165) and be done with it. But an aggressive creditor will eventually get his money.

6.) Every time I hear someone extol the virtues of a spendthrift trust, I’m reminded of the following line from the movie, A Princess Bride: “That word doesn’t mean what you think it means.” A spendthrift provision prevents the voluntary or involuntary alienation of the beneficiary’s interest (§502 of the Uniform Trust Code). So, let’s assume that beneficiary John Smith owes $10,000 to Mr. X. Mr. Smith cannot transfer his interest to Mr. X to satisfy the debt (For more, please see Nichols, Assignee v. Eaton Et Al, 91 U.S. 716, 23 L.Ed. 254 (1875) ).

But a spendthrift provision only applies to the trust; once the money is distributed, it can be attached any number of ways. If it’s transferred to a pass-through entity such as a family limited partnership, a creditor can use a charging order to obtain his funds. If the money is transferred to a bank account, the creditor can simply levy the bank account. For a discussion of the procedures in my home state of Texas, please read “Post-Judgment Remedies: Garnishment, Execution, Turnover Proceedings, Receiverships Under the DTPA, and “Other Stuff” by Donna Brown. Ultimately, this gets back to point number 5: an aggressive creditor is going to get his money eventually.

7.) Why would you choose to be shielded behind an APT’s spendthrift provision — which is a new legal concept (in legal years) — when you can use a pass-through entity like an LLC whose liability shield is very well-developed? Brief history: the corporate limited liability shield came about sometime in the mid-1800s. I believe New York was the first state to adopt the concept. It caught on like wildfire and has now been praised as a key concept of a capitalist society (For an in-depth discussion, please see Stephen Presser’s book, Piercing the CorporateVeil).

Corporate limited liability is now a very well-developed legal concept developed over hundreds of cases. This is great news for planners because we have exacting detail about what works and what doesn’t. Why not use this area of law — that also has a number of favorable decisions — instead of APT law which so far has issued a large number of anti-APT decisions?

Again, these are presented in no order of importance. But with yet another asset protection trust failing when challenged, I believe these points have a great deal of merit.